February 16, 2014

CBO’s Curious Risk Corridor Projections.

by Hal Gershowitz

Comments Below


We have long admired the Congressional Budget Office, which was established when Richard Nixon signed into law P.L.93-344, The Congressional Budget and Impoundment Control Act of 1974.  Its mandated role has been to provide Congress and the nation with impartial analysis of the cost impact of both proposed and enacted legislation.  The first (and longest serving of its 14 Directors), Democratic economist Alice Rivlin, got the new agency off to a good start, and it has for the most part, provided the impartial analytical support the law intended.

We have poured through the most recent CBO Report, which we wrote about in last week’s essay, and were surprised to read that CBO forecasted that the federal government would realize a gain from the so-called risk sharing arrangement of the Risk Corridor provision of the Affordable Care Act. The Risk Corridor provision applies only to companies offering plans on healthcare.gov and state-run exchanges. CBO projects an $ 8 billion gain. Our purpose is not to debate whether the government will come out ahead (although we doubt that it will), but to question the basis for any projection at all at this point in time.

The reader will recall that the ObamaCare Risk Corridors are there to mitigate loss (or gain) by the nation’s health insurance providers given that they must insure all comers without regard to age, sex, pre-existing conditions or general health. In other words, they must, initially, guess at who their new ObamaCare policyholders will be and in what condition of health they will arrive knocking at their door.  Beginning this year, and continuing for three years the insurers pay all benefit costs up to 102% of a pre-determined target, and the government (the taxpayers) pays 50% of the benefit costs between 102% and 108% and 80% of all benefit costs over 108 percent of the target.

So here’s the rub.  As of now, there is absolutely no ObamaCare data upon which to base these three-year projections of gain or loss. CBO won’t have any ObamaCare related data until the March 31 sign-up deadline is reached and for several months thereafter. Forecasting with no data isn’t forecasting at all.  It’s guessing.

Obviously, CBO doesn’t guess.  It simply had to use some data in order to make projections about the future.  This makes the relevance of whatever data they did use extremely important.  So we started to dig and found that the CBO, essentially, based its projections on the performance of Risk Corridors in the Medicare Part D Prescription Drug Program that became effective in 2006.

So what’s wrong with that?

Plenty, we think.  First, everyone knew who would sign up for Medicare Part D.  That was pretty much a no brainer.  Just about everyone who was on Medicare who was not covered by a private prescription drug program was pretty certain to sign up.  No one knows who is (and who will be) signing up for ObamaCare.  Medicare actuaries also knew that many patient-protected drugs were about to lose their patients and that the cost of many prescriptions would plummet as generic substitutes became available. In other words, CBO made projections based on data that bears little relevance to ObamaCare.

Does it matter?

Actually, it does.  Some Republicans (count Florida Senator and presumed presidential hopeful Marco Rubio among them) have been urging repeal of the Risk Corridor provision of ObamaCare.  They are calling the Risk Corridors a potential bailout of the insurance industry (an assertion we feel is overblown). Because of the CBO projection of an $8 billion gain for the government, however, elimination of the Risk Corridors will  (as far as CBO is concerned) produce an $8 billion increase in the deficit.

Given that CBO’s position on the Risk Corridors had been neutral, that is, what the government took in and what the government paid out would, essentially, balance out, what led CBO to make such a bullish projection?  CBO acknowledges that  “the government has only limited experience with this type of program, and there are many uncertainties about how the market for health insurance will function under the ACA.”  That, of course, may be the understatement of the year.  Early indications of what that experience will be must be very troubling, given the Administration’s decision last week to push off the the employer mandate compliance requirement by yet another year.

CBO says it tries to base its projections of new programs on the experience of similar existing programs where possible (i.e. Medicare Part D prescription drug program)—rather than by actually asserting an analogy between the two systems in which these different risk-corridor provisions exist.  This seems to us to be rather reckless.

Seth Chandler, a law professor at the University of Houston Law Center, seems to agree.  Chandler has, for many years, taught insurance law, including life and health insurance law.  Chandler warns, “

I’ve done the math and I don’t see how the CBO is getting this $8 billion number unless it is assuming either very high enrollment in policies covered by Risk Corridors or very high rates of return made by insurers.  Or it made a mistake. I don’t think the CBO’s own numbers support very high enrollment in policies covered by Risk Corridors and I don’t believe either an emerging reality or the CBO’s own rhetoric justify assuming very high rates of return.  So I think the CBO ought to take a second look at its prediction. People should not yet make policy decisions based on the CBO estimate.”

It seems clear that evidence, so far, from the exchanges appear, well, rather troubling.  Humana has just projected it would need to tap Obamacare’s reinsurance, risk-adjustment, and risk-corridors—for between $250 and $450 million in 1914. That’s 25 percent of the company’s projected revenue in the exchanges. Humana attributes such enormous projected losses to the worse-than-expected risk profile of its exchange customers and to the Administration’s late-year “fix” allowing some people to extend their 2013 coverage into this year.

Wellpoint suggested, in a recent filing in California, that they were experiencing similar problems contradicting comments by top officials that things were going better than expected.   And now it seems that Cigna and Aetna are beginning to send similar signals.

We really don’t know what to expect when the real numbers finally come in regarding how healthy or sick the healthcare.gov or the ObamaCare exchange enrollees will be.  And CBO doesn’t know either. We know the CBO’s report and projections concerning Risk Corridors could not have been based on any information regarding the health status of enrollees, because no such data have yet been compiled and integrated for meaningful analysis. It simply doesn’t exist. Instead, CBO made projections based on an entirely dissimilar program.

Any similarity between real outcomes and CBO’s projections, therefore, will be purely coincidental.

All comments regarding these essays, whether they express agreement, disagreement, or an alternate view, are appreciated and welcome. Comments that do not pertain to the subject of the essay or which are ad hominem references to other commenters are not acceptable and will be deleted.

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2 responses to “CBO’s Curious Risk Corridor Projections.”

  1. Mark J Levick says:

    If my recollection is correct the CBO forecast that passage of the ACA would reduce the deficit which helped its enactment. The forecast on which your essay focuses and which is based purely on speculation, will be a talking point for our President. Could it be that the CBO is not impartial after all?

  2. Charles Anderson says:

    I admire your dedication to research. I agree that early projections are fungible but, on all on all sides of the law as implementation proceeds. For example, recent news articles report some surprise that some of the exchanges are seeing young people in the most desired demographic sign up in larger numbers than projected. As with almost all legislation there will be modifications based on the realities of implementation, including unanticipated consequences.
    In the history of your essays you have cited the CBO on many occasions, I think it only fair to see what their ongoing assessment is before reaching any conclusion they are dead wrong or biased when it comes to the Affordable Care Act (the actual name of the law is NOT Obamacare).

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